Thursday, February 16, 2017

Why go after Milton Friedman?

The top question on my Reddit AMA was "When and why did you start hating on our lord and saviour Milton Friedman?". Two or three other questions were basically the same.

And it's true, I have been on a Milt-bashing kick of late. I did a post evaluating how Friedman's macro theories had held up, and gave them a C+ overall. I wrote another post complaining about his "pool player analogy", which people use to justify not checking their model assumptions against micro data. I wrote two Bloomberg posts declaring the Permanent Income Hypothesis dead (post 1, post 2). And I wrote a tweetstorm (since deleted in a periodic tweet-wipe) about how Friedman's libertarian policy program might have prevented racial integration in the United States.

My revisionist campaign against the late Friedman has ruffled a lot of feathers. Uncle Milt is something of a secular saint among both economists and libertarians. If you say "people don't smooth consumption," economists will talk about the issue calmly and reasonably, but if you say "the Permanent Income Hypothesis is wrong" - which means exactly the same thing - lots of hackles are instantly raised, and people jump to defend the hallowed PIH. Similarly, in policy discussions, if you diss vouchers, people will argue, but if you say "Milton Friedman was wrong about vouchers," they get mad.

So why do it? Why not leave Friedman alone and just talk about his ideas, or the modern-day versions thereof? Here are my reasons:

1. Clickbait!

Saying "X is wrong" gets less attention than saying "X, which Milton Friedman supported, is wrong." So why not do the latter? If it gets more laypeople paying attention to economic research and serious economic ideas, I say that's a good thing.

It's hard to get people interested in the latest research on consumption smoothing. That is a nontrivial thing to do. And putting Friedman's name up there is one way to do it. As long as I'm not misattributing anything to the man, what's wrong with that?

2. Fighting against "Great Sage" culture

"Science alone of all the subjects contains within itself the lesson of the danger of belief in the infallibility of the greatest teachers of the preceding generation," Feynman said. And you should take it from him, right?. ;-)

Anyway, that principle makes sense. If understanding is going to progress, people can't have too much reverence for the opinions and theories of respected humans. In the humanities, there tends to be a lot of reverence for the ideas and thoughts of the Great Old Masters. "Kant said X" and "Foucault said Y" are things you'll actually hear when you talk to humanities types. Who cares? Why should I believe Kant or Foucault? I never understood this. I guess in the humanities, lots of things are just matters of opinion, or untestable conjecture, so it's not that important to go out and try to prove Kant wrong. But in a scientific field, it's the knowledge that matters, not the people who found it (or tried to find it and failed). Too much reverence for the teachings of a Great Sage can hold people back from finding better ideas.

I feel like economics has a bit of Great Sage disease. People are way too reverent about old masters like Friedman or Lucas. This is in contrast with physics, where people delight in saying "Einstein was wrong" or "Feynman was wrong" about something. I like the irreverent way better.

3. Annoyance at the mixing of econ and politics

In his scholarly writings, Friedman was careful to draw a distinction between normative and positive economics. But it's not clear his fans got the message. Friedman very publicly engaged in policy advocacy. His most famous book was an ideological tract. They made that book into a TV show!

Do you think that Friedman's status as a top academic economist had nothing to do with the respect and credence that were afforded to his ideological and political ideas? If so, I've got a bridge to sell you. Friedman taught a generation of fans that laissez-faire policies were great, and his academic status lent an imprimatur to those teachings that a Wall Street Journal writer or libertarian pundit never could have enjoyed.

So by informing the public that Friedman got some big things wrong in his academic research (which of course is true of any economist), I hope to be able to dispel a little of that mystique. Fans of Friedman's libertarian ideology need to know that their sage was just as fallible a scientist as any other.

So there you go. Three reasons to publicly criticize the ideas of Milton Friedman. As for reasons not to -- well, the man has already passed away, and he amassed so much fame and respect that the tiny stings of an insignificant insect such as myself pose no real threat to his legacy. So I don't feel guilty at all.

19 comments:

I think you're being a bit harsh in giving uncle Friedman a C+. What would you give Keynes or Adam Smith whose ideas in their original form are arguably less supported by evidence? Friedman got people to think in the right direction (just like Keynes) and while he might have pushed it too far in policy circles he was still right in sign if not magnitude at a time when most people got even the sign wrong.

I do agree that people worship him way too much in macro. I mean they won't let any of his ideas die to behavioral theories which have long been accepted in finance (my field). Maybe because finance has (gasp) efficient markets for ideas.

I agree that we should never worship old sages. I complement you on that. But why not go after Keynes himself as well? Keynesians and left-wingers worship him just as much as Friedman is worshipped.

I wouldn't say that Friedman introduced anything new. There is nothing substantive that macroeconomists of his day or even OUR day have known that was not known by economists in 1930. His importance, I think, is not that he introduced new ideas, which I don't think he did, but that he resurrected monetary policy to its property place of dominance. Here are the new, but really old, ideas that he brought back...

1. The Great Depression as caused by monetary policy and not 'animal spirits'

2. Monetary policy > Fiscal policy

3. Rising inflation as being caused by increased money growth rates, as opposed to supply side sources.

4. Bringing back the fisher effect to its place of importance. Therefore, low interest rates representing tight money due to the fisher effect, as opposed to loose money due to the liquidity effect

5. The lack of a long run trade off between unemployment and inflation. In the long run, AD stimulus will only give us inflation.

7. The monetary transmission effect as going through not only interest rates, which is what Keynesians emphasize.

Of course, he got much wrong...

1. The Great Depression was caused by gold hoarding by central banks and not by bank crises and the fed refusing to increase the base

2. That the bank deposit ratio is constant. That money demand is constant. Thefore, that the monetary aggregate can be controlled by the monetary authority.

3. A k% rule for monetary policy

4. He later made bad predictions about inflation growth

I can't speak much about his views on flexible exchange rates or the PIH. I don't know much about them.

Also, I don't agree with your criticism of his methodology. I don't interpret him as saying that you can't reject a model on the basis of its assumptions. I think his point is simply that the goal of a model is not to be a 'realistic' description of reality. The goal is to make predictions. You can reject a model on the basis of its assumptions, but only because you think that its highly unrealistic assumptions will lead to bad predictions, but not because you don't like having them for their own sake.

@ Noah - I'm baffled at how little respect you give to Friedman's contributions on monetary policy. Sure, the quantity theory isn't strictly true, but he undoubtedly pushed macro in the right direction, and away from bogus explanations for inflation (unions!) or depression (stock market bubble!). Furthermore, he got to that conclusion by careful empirics, not just relying on abstract theory!

As Christy Romer said (when ranking the best books on economics), "The General Theory is an incredibly important book, but it's basically a theoretical explanation of how aggregate demand could affect output. It was Friedman and Schwartz who provided the empirical evidence that supported the theory. That's why A Monetary History went to the top of my list."

Are any of those 1-5 + 7 ideas "correct" (6 seems to be missing)? Or are some of them simply policy preferences (monetary policy > fiscal), or simple tautology (money supply growth rates) that gets causality incorrect?

Granted, I think the Fisher effect is important, and I think that while human psychology's affects on economic behaviors like consumer confidence is important (loosely translated into "animal spirits"), Keynes missed the Debt-Deflationary aspects of the Depression which Fisher captured. Friedman missed it too, and so did most modern economists, so it's not exactly a mark in favor of Friedman.

The problem with Friedman is that he got most things empirically wrong, and moreover, allowed for a certain group of guys to turn Macroeconomics from an imperfect field of study into a the realm of a complete pseudoscience with Rational Expectations and DSGEs. Neither of those things would've ever had the influence they did had Chicago never been given prominence by Friedman, nor had Friedman shaken the intellectual foundations that post-war Economics was built atop of. And the reasons behind the shake-up, he wasn't correct on either.

Money supply phenomenons were a terrible explanation for what happened in the 1970s. You had some aspects of a wage-price spiral happening in the early 1970s, but it was a phenomenon that was almost exclusively caused by supply-side issues, primarily in the oil markets. (some others too, i.e. the wheat harvest failures in Russia). Friedman shifted the focus to "expectations", when expectations didn't matter a whole lot. Post-2008 has been like Kryptonite to Friedman's ideas, from "tight monetary caused the Great Depression" to over-reliance on monetary policy and central banks definitively setting "expectations" and expecting a concrete transmission mechanism.

I listed those Friedman statements because they are correct and broadly accepted by the mainstream profession. And I wanted to be brutally fair so I listed the things he got totally wrong and which have been totally rejected by the mainstream profession.

6 was a typo! :)

I don't see how Friedman can be blamed at all for Rational Expectations and DSGEs. He had nothing to do with that and never used those paradigms.

Concerning Keynes, his mistake was arguing that animals spirits explain the Great Depression. They don't. It was caused by gold hoarding by central banks.

I agree that oil shocks caused large shocks to prices, but I just don't by the cost-push explanation otherwise. I don't think they explain the continually rising price level and GDP over twenty years in the 60s and 70s, and then why it suddenly fell in the early 1980s.

I also, agree with monetarists that the Great Recession was caused by tight money.

The two previous posts are hilarious -- blind assertions about why things happened in the past totally inconsistent with actual facts (gold hoarding! oil prices!) spouted by ignorant people on the Internet. I think we all know who these guys are.

Upfront, I’ll say I’m not an economist nor trained as one, but I’ve read quite a bit of it economic theory when I thought of being one (I think when I go to college I'm doing math now). I kinda-of walked away when I started getting deep into the DSGE literature and making my way through papers like CEE and Smets-Wouters and realized a lot of the modeling assumption were shaky and empirically poorly grounded. I still like a lot of the institutional / political economy literature though. But yeah, I’m somewhat sympathetic to your perspectives on economics.

I think people get mad at you because it seems like you are disrespecting one of the giants of the field. Sure, Friedman’s theories were wrong in meaningful ways, but they were important and have shaped economic theory. Consider the PIH. I view the PIH as similar to the Bohr model. But I wouldn’t trash Bohr as just “wrong,” because that’s too simplistic. Now the model was wrong, even on really basic things like ground state momentum, but it was a significant historical development that helped lead to QM. Plus, we can probably agree that the consumption smoothing model is better than the Keynesian consumption function right? Now it appears with liquidity constraints and psychological / cognitive limitations that some “mix” of the two models is appropriate (though this can be very tricky to model realistically), but the PIH was an important step. I agree that economist should move away from the consumption smoothing benchmark, not sure that Friedman is to blame for this though.

I largely agree with points #2 and #3 though.

#2 probably says more about economics as a science than it does about “great sage” culture. Adherence to Ricardian Equivalence assumptions is rooted in ideology surely more than deference to Barro, for example.

#3 Obviously his academic stature gave respectability to his political views, Friedman was also just a really good communicator though. For comparison, Paul Samuelson had columns alongside Friedman in Newsweek, but he never took off as a political force though.

Also, no you shouldn't feel guilty. Guilty for what? Friedman strikes me as a guy who could easily take a critique.

Econ grad students are waaay too reverent of Great Sages and the culture is waaaaaaay too hierarchical. But I'm not sure Friedman himself is, at last in academia, still achieves Great Sage status. He flirted with politics too much, and got written out of macro textbooks by RBC creeps.

However, when I tell lefty laypeople that I study economics, they ALWAYS ask about Friedman, so having a good grab-bag of dismissive opinions about him is a good wedge to curry favour with them. Once they trust that you're not "one of those Milton Friedman types", you can get away with a lot more contrarian economics opinions. So he's been at the very least sociologically useful, to me, as a punching bag.

Also, *AHEM* they made the TV show Free To Choose first, and the book was based on the TV show. But the publisher managed to get it to the presses before Free to Choose hit the air. (Source: EconTalk http://www.econtalk.org/archives/2006/09/friedman_on_cap_1.html)

How weird--economics scholars are the *least* reverent of "great sages" of all the social sciences. It's a mark of how distant the blogosphere is from the field when it gives people the sense that this is true.

As a philosopher, I feel compelled to respond to your Great Sage comments #2.

Here's something I noticed happening in my own case the more expert I became in my selected specialization within philosophy (metaethics): name-dropping became shorthand for theories. So saying, in the context of a metaethical discussion, "Kant says X" is shorthand for something like "the metaethical system that most historians attribute to Kant, details aside, produces the judgment that X." The force of the claim isn't that Kant believed X, and so you should too; the force is that philosophical system P entails X, and so you should believe X if you accept P.

Obviously, this reveals the extent to which name-dropping is very much inside baseball; the difference is that it's actually (sometimes) useful as a practice within an epistemic enterprise.

And also obviously, there are also all sorts of noncognitive pushings and pullings going on in the evocation of various figures (naming Kant tends to draw the ire of those allergic; naming Nietzsche tends to brand you as a 'certain kind of philosopher'; etc), but to say that is just to acknowledge that rhetoric is real. There is real cognitive work also being done by name-dropping (in the proper contexts).

The reason people go after Friedman is because he was an active spokesman for a package of ideas that have not only been debunked but are still having pernicious effects today. He's like Marx. People associate him with the failed Soviet economic system, though he had less to do with the Soviet Union than Friedman had to do with Reaganomics and its failed successors.

If Elsie the Cow had been a spokes-cow for a package arguing against government spending, high marginal tax rates, deregulation, ending industrial policy and so on, a lot of people would be saying mean things about Elsie.